U.S. House Panel Approves Measure to Boost Covered Bond Market

June 22 (Bloomberg) -- A bill aimed at establishing a
viable U.S. covered bond market was among six measures advanced
by the House Financial Services Committee.

The committee voted 44-7 today to approve the bill, which
would provide a regulatory framework for covered bonds by giving
the Treasury Department oversight of the market and creating a
separate resolution process in order to bolster investor
interest. The bill, if signed into law, could provide a boost to
issuers including Bank of America Corp. and JPMorgan Chase & Co.

“This was a strong, bipartisan vote out of committee, so I
think that should bode well on the House floor and bode well in
the Senate where I think there is growing support over there as
well,” Representative Scott Garrett of New Jersey, the
Republican sponsor of the bill, said today in an interview.

The House panel also approved two bills that would make
changes to the Dodd-Frank financial overhaul enacted last year.
Representative Spencer Bachus, an Alabama Republican who heads
the committee, said the measures were designed to free up
capital that has largely been sitting on the sidelines in the
wake of the worst recession since World War II.

House and Senate lawmakers, led by Garrett, have been
drafting legislation for much of the last two years to create a
market in the U.S. for covered bonds. Supporters say that they
can serve as an alternative funding mechanism for banks and a
way to provide liquidity in the mortgage market without relying
on the federal government to securitize or insure mortgages.

Prussian Invention

Covered bonds are financial instruments backed by a pool of
assets like mortgages or public-sector loans as well as by the
issuer’s credit. Pioneered in 18th-century Prussia, they get
higher credit ratings than other bank notes and pay less in
interest because they augment the issuer’s repayment pledge with
assets that can be sold in case of default.

In the U.S., legal uncertainty surrounds what happens if
the issuer fails and bondholders and depositors both claim the
bank’s assets.

The Federal Deposit Insurance Corp. has voiced concerns
about the priority of covered bonds in the event of a bank
failure, as well as whether the FDIC would become the de facto
guarantor of the instruments. The agency, which runs the Deposit
Insurance Fund and is responsible for resolving failed banks,
has sought flexibility in dealing with the bonds in the event of
a failure -- including the authority to repudiate a covered
bond.

Failed Amendments

“The FDIC’s concerns, I believe, continue to be
legitimate,” said Representative Barney Frank, the senior
Democrat on the committee, who unsuccessfully offered two
amendments drafted with the agency to change the measure. “The
FDIC believes, I think correctly, there will be problems in some
of these cases and the FDIC will not be fully protected.”

In an effort to alleviate some of the agency’s concerns,
Representative Carolyn Maloney, a New York Democrat, offered a
successful amendment that extended to one year, from 180 days,
the amount of time the FDIC would have in event of a bank
failure to hold the exclusive right to transfer the covered pool
to another eligible issuer.

The panel also agreed, by voice vote, to a requirement that
the Treasury write rules to cap the maximum amount outstanding,
as a percentage of total assets, that any one issuer can hold.

Andrew Gray, the FDIC’s spokesman, said in an e-mailed
statement that the bill would subsidize covered bond investors
with the deposit insurance fund and “will add to the funding
advantage” of large banks.

‘Super Class’

“The bill creates a super class of protected investors
that will face no risk with their investment -- giving them
rights available to no other private secured creditor and
freeing them of the market discipline we are trying to
restore,” Gray said.

The largest U.S. financial industry trade groups, including
the Securities Industry and Financial Markets Association and
the American Securitization Forum, supported Garrett’s measure.

“Investors will not dedicate funds to this market unless
the legal regime is unequivocal and the risks can be identified
and underwritten,” Kenneth Bentsen, the executive vice
president for public policy at Sifma, which represents banks
including Goldman Sachs Group Inc. and JPMorgan, said in a June
20 letter of support to the committee.

Only two U.S. banks, Bank of America and JPMorgan, ranked
among the top 30 in global covered bond issuance in 2010,
combining for 2.9 percent of the world’s market share.

Private Equity

In its other action, the committee, by voice vote, approved
a full exemption in Dodd-Frank for private-equity fund advisers
from the law’s requirement that most advisers to private
investment funds register with the Securities and Exchange
Commission. Current law, which the SEC moved to implement today,
exempts advisers to private funds with less than $150 million in
assets under management.

Frank, a Massachusetts Democrat, criticized the bill for
removing a requirement that was “hardly the heavy hand of
regulation.”

Representative Robert Hurt of Virginia, the Republican
sponsor of the bill, and Representative Jim Himes, a Democrat
from Connecticut, agreed on an amendment that would revoke the
exemption for all firms with leverage any higher than twice its
assets.

Representative David Schweikert, an Arizona Republican,
sponsored a measure to increase the registration exemption
threshold for smaller securities offerings over a 12-month
period. The bill, which also was approved by a voice vote, would
exempt public offerings of $50 million or less from SEC
registration. The bill would raise the exemption threshold to
$45 million from its current level of $5 million.

Executive Pay

The panel also approved, 33-21, the repeal of an 18-line
provision from Dodd-Frank that requires all publicly traded
companies to report the ratio between chief executive officer
compensation and that of their median employee salary.

The provision in Dodd-Frank is “a burdensome regulation
that provides no benefit and has substantial costs,”
Representative Nan Hayworth of New York, the Republican sponsor
of the bill. “It creates heat but no light.”

If the bills are approved by the full House they would need
to clear the Democratic-controlled Senate and the White House
before becoming law.